Although Fannie Mae and Freddie Mac have a reduced lending cap for 2021, there’s no shortage of agency debt for qualified multifamily borrowers. Moreover, the GSEs are lifting some pandemic-related restrictions they put in place last year.
“With COVID, the agencies prudently instituted certain reserve requirements,” says Frank Lutz, executive vice president and chief production officer for Arbor Realty Trust, a REIT that specializes in direct lending. “Today, we are beginning to see some of these requirements rolled back.”
Last year, GSEs were the leading capital source for originated loans, responsible for $164.1 billion of total origination volume of $272 billion, according to the Mortgage Bankers Association (MBA). This year, the agencies have a loan purchase cap of $70 billion each, for a combined total of $140 billion.
“Agency debt remains plentiful at this time, even with the agencies operating under a reduced volume limit from their regulator,” Lutz notes. “It remains to be seen whether this will continue once we move through the summer months.”
Return to pre-pandemic levels
When multifamily lending froze up early in the pandemic, the GSEs took the lead, albeit with added underwriting restrictions and COVD-19 debt service reserves, according to Kate Byford, head of agency finance at Capital One. Debt was priced at the 350 to 400 basis points for the majority of asset types, with floors ranging from 0 to 100 basis points.
“Fannie and Freddie did an incredible job navigating the turbulence to provide stability, liquidity, and affordability in the multifamily market,” Byford says. “In the second half of the year, we saw record volume as the agencies stepped into the market.”
Over the last several months, the agencies have eased their debt service requirements and floors have disappeared, she notes. “We are now seeing pricing compression in stabilized multifamily.”
Capital One’s closed loan volume was slightly down in the first quarter of 2021 compared to the highs of the past couple of years, both in terms of deal count and dollar volume, according to Byford. She attributes the decrease to the agencies pushing to close more business under the 2020 cap, which led to a smaller pipeline heading into 2021.
Meanwhile, Arbor Realty Trust originated $1.25 billion in agency loans during the first quarter 2021, which was an increase of almost 56 percent from roughly $800 million for the same period last year, according to Lutz. For context, the REIT originated $740 million during the first quarter of 2019.
Agency originations have also increased at Berkadia, one of the nation’s largest multifamily originators. The firm’s investment sales team had a record-setting first quarter, closing $3.5 billion in deals, and as a result, the company’s mortgage banking business experienced increased demand for acquisition financing, according to Hilary Provinse, executive vice president and head of mortgage banking at Berkadia.
“We have seen production begin to normalize and indicate a return to pre-pandemic levels,” Provinse says. “We are optimistic that sales and financing activities will remain strong in the year ahead. We’ve already seen indicators of positive momentum.”
Succeeding in the mission
Over the past few years, the GSEs have focused more and more on affordable housing, be it subsidized housing or workforce-oriented housing. This is especially true for repeat or priority agency borrowers with proven track records.
For 2021, at least 50 percent of the agencies’ multifamily loans are mandated for affordable housing, per the Federal Housing Finance Agency (FHFA). In comparison, under the 2020 cap structure, only 37.5 percent of agency multifamily business had to be mission-driven, affordable housing.
“The agencies have embraced this part of their mission more than ever and work hard to be in this space providing liquidity,” Lutz notes, adding that smaller and medium-sized borrowers and properties represent a huge piece of Arbor’s lending business. “More often than not, these properties and transactions are targeted as workforce housing and very mission-centric for the agencies.”
Currently, the GSEs are less active on deals in high-cost areas of the country, particularly along the coasts. Instead, they’re favoring middle market transactions that have affordability components.
Neither agency shies away from the large transactions, according to Provinse but serving middle markets makes the FHFA caps stretch further and satisfy more borrower clients. Moreover, these deals more often fit the definition of mission-driven business for the GSEs.
While Fannie and Freddie are focused on workforce and affordable housing that doesn’t mean they aren’t interested in other types of multifamily, Lutz points out.
“They certainly get excited when they see opportunities in strong markets from highly skilled, financially strong borrowers with long successful track records,” he says. “If they capture their share of this business, they are more comfortable taking risk in some markets that are perhaps less dynamic with borrowers with skill and capabilities but [who] are still building their track records.”
Agency debt still in demand
Agencies continue to offer ideal long-term, fixed-rate terms and higher leverage, which generally tops out at 80 percent loan to value (LTV), as well as tiered pricing for the purchase or refinance of multifamily properties.
This translates into strong borrower demand for agency financing, particularly in core coastal markets where there are more stringent rent regulations and owners expect property values to decrease. Because agency lending helps to mitigate financial pressure caused by local rent restrictions, borrower demand in these markets has increased, and experts say it’s likely that demand will grow as other markets introduce rent regulations.
Additionally, the GSEs have invested in technology that allows them to process loans quickly, which has leveled the playing field with other lenders. In fact, non-GSE lenders are now “breaking their own molds to compete with the GSEs,” Provinse notes.
For example, many non-GSE lenders are now offering financing with longer terms and fixed rates that weren’t available before. That, combined with a level of flexibility that sometimes cannot be achieved by the agencies, make these non-GSE lenders more competitive.
Life companies, in particular, are competing with GSEs for lower leverage loans on stabilized assets. On the other end of the spectrum, debt funds are competing more aggressively with GSEs for higher leverage, transitional assets.
“More competition from life companies, debt funds and banks means the GSEs will need to compete hard for key opportunities, particularly lower LTV deals,” Provinse says, adding that the increasing interest from other capital sources is positive, given the FHFA caps’ effects on GSE competitiveness in high-cost areas of the country, particularly along the coasts.
Lutz expects Fannie and Freddie to remain active throughout 2021, focusing primarily on workforce housing. “They have become better at managing to their caps, but it is always a concern that forces beyond their control could cause a liquidity crunch and disrupt the market,” he says.
